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Canadian Dollar Outlook: Bank of Canada will Drive the Next Move in USD/CAD

Canadian Dollar Outlook: Bank of Canada will Drive the Next Move in USD/CAD

Nick Cawley, Senior Strategist

Canadian Dollar Price, Chart, and Analysis

  • Canadian inflation is at an 18-year high.
  • Bank of Canada to expand on bond reinvestments.

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The latest Bank of Canada (BoC) rate decision is likely to leave all policy levers untouched tomorrow, but commentary from BoC governor Tiff Macklem on inflation and the central bank’s bond-buying program will need to be closely followed as price pressures soar in Canada. Inflation is currently running at 4.4%, an 18-year high, with the latest data from Statistics Canada showing that prices rose in all eight major components, with transportation and gasoline contributing the most to increase. Governor Macklem’s comments on inflation, and various supply pressures and bottlenecks, will go a long way to driving the path of the Canadian dollar over the next few weeks.

The BoC is also expected to continue to trim back its bond-buying program and enter what governor Macklem calls the ‘reinvestment phase’ where the central bank keeps its bond holdings stable and only buys enough bonds to replace those that are maturing. This will tighten monetary conditions, nudging bond yields higher, but it is unlikely that it will be enough to contain the current level of inflation. Governor Macklem may also suggest that the central bank may bring forward interest rate hikes from Q2 to Q1 2022 if the current level of economic slack has been sufficiently absorbed.

USD/CAD has broken out of its multi-week downtrend and is currently treading water ahead of Wednesday’s BoC meeting. The sell-off from the September 20 high has been fairly relentless with the pair losing over six big figures in just over one month. The chart remains mildly negative, despite the trend breakout, with all three simple moving averages in a bearish set-up. The October 21 multi-week low at 1.2288 may soon be revisited.

Canadian Dollar (USD/CAD) Daily Price Chart October 26, 2021

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Retail trader data show 75.96% of traders are net-long with the ratio of traders long to short at 3.16 to 1. The number of traders net-long is 5.00% higher than yesterday and 8.29% higher from last week, while the number of traders net-short is 3.14% lower than yesterday and 6.35% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias

Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 0% 18% 11%
Weekly 30% -1% 8%
What does it mean for price action?
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What is your view on the USD/CAD – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.